Profit & Loss - August 2001

Don't Fear the Current Economy —

Embrace It

by Lewis Mills

As the economy has slowed recently, we have seen many businesses panic and make drastic cuts in their labor forces. This leaves them vulnerable to competition because they tend to become extremely conservative — they "hibernate," hoping to simply outlast the bad times. For most businesses, that’s the absolute worst thing to do. This is when you need to become proactive. Success is not about out-lasting or out-spending your competitors. It’s about out-thinking them.

Unfortunately, most businesses don’t plan for economic downturns. During good economic times, they are lulled into a false sense of security. It’s during these boom times that companies should be planning for downturns by implementing a strategic planning process. During the contingency planning portion of this process, different probable scenarios are identified. At least one of these scenarios should include an economic downturn, and a plan for what the business will do in that eventuality.

If your business has not implemented a strategic planning process and is not prepared for a reduction in the market, don’t panic. Fear ripples through an organization and decisions made in haste can cripple your business. There are still many opportunities to stay competitive and, if done correctly, you may be able generate even more opportunities for your business. What most managers don’t realize is that their competitors are also suffering from this same downturn — therefore, the goal should be to improve how their business is currently operating in comparison to the competition.

Here are some suggestions for improvement:

Review your processes. This includes all processes — accounting, operational, distribution, sales, etc. Taking a fresh look at things may show you ways to cut expenses or increase efficiency. After doing this, one company decided to change the way it distributed its product. Instead of directly trucking the product to the customer, it started using railcars to transport the product to "reload" sites and then trucking it from these sites to the customer. This change in distribution saved approximately $500,000 per year in freight costs.

Look to new technology to improve productivity. This doesn’t just mean office computers and financial software. It includes looking at technological updates in operational areas. By increasing productivity, the cost per unit of a product can reduce to the point where a lower sales price still generates the same or greater profit.

Review the allocation of resources. This is not the same as cutting costs. As stated previously, too many companies panic and jump on the layoff bandwagon. Across-the-board cuts usually do more damage than good for a business in the long run. But this doesn’t mean cost cutting should not occur. All organizations have excess costs that need to be evaluated, but a reduction in certain costs can have drastic and sometimes fatal consequences on a business. If your company sells a quality product, don’t cut costs to the point where that quality suffers.

Become more aggressive in the market. As part of your resource allocation, realize that marketing, sales and advertising play an important role in maintaining the current level of revenues. Too many companies lay off large portions of their sales force, cut advertising budgets or reduce promotional items — then six months later, revenues drop off. During this time, the goal should be to at least maintain and if possible, expand the company’s sales.

There are many more areas where "out-thinking" your competition can pay off. Just remember to be aggressive and don’t panic. Even if you haven’t planned for this downturn, your company can still take advantage of the situation. And when the good times arrive again, prepare to plan.

Lewis Mills
Lewis Mills is a business consultant with Ashley Quinn Business Solutions LLC in Reno.